Supreme Court Set to Hear Argument in Wynne on Constitutionality of Failing to Give an Income Tax Credit for Taxes Paid to Other States

[Note:  Miller & Chevalier filed an amicus brief in this case in support of the taxpayers on behalf of the National Association of Publicly Traded Partnerships.]

Supreme Court briefing is now complete in Comptroller of the Treasury of Maryland v. Wynne, No. 13-485.  The issue presented is whether the U.S. Constitution requires a state to allow residents to take a credit against their state income tax liability for income taxes paid to other states on income earned in those states.

Maryland’s state income tax system taxes its residents at both the state level and the county level. Like other states, Maryland recognizes that its residents might earn income out-of-state that will be taxed by the state in which the income is earned, and it provides a dollar-for-dollar credit against the Maryland state income tax liability for those payments. Since 1975, however, Maryland has not provided a similar credit against the county income tax.

Whether Maryland’s failure to give a credit against the county income tax is constitutional depends on the application of the so-called “negative” or “dormant” Commerce Clause.  The Commerce Clause is an affirmative grant of authority to Congress to regulate interstate commerce, but the Supreme Court has long understood it to have a negative aspect as well, which “denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce.” Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93, 98 (1994).  This principle often comes into play in invalidating state taxes that favor in-state businesses and in assessing the fairness of apportionment formulas used to calculate what portion of a multistate corporation’s income is taxable by a particular state.

The Maryland Supreme Court held that Maryland’s failure to grant a credit against the county tax resulted in impermissible double taxation.  The State, however, argues that nothing in the Supreme Court’s Commerce Clause jurisprudence requires a state to give such a credit.  To the contrary, Maryland argues, the Court has remarked that states have the power to tax the income of their residents, even if it is earned out-of-state, and that power should not be diminished just because of the decision of another state to tax the same income.  The taxpayers, however, note that the statements relied upon by Maryland were made in the context of the Due Process Clause and do not indicate that the Commerce Clause can abide the double taxation inherent in Maryland’s failure to give a credit.

Although all states, even Maryland, currently give a credit against the state income tax, the arguments for not requiring a credit against the county tax are equally applicable to the state.  Thus, if Maryland prevails in this case, it could open the door for cash-strapped states to decide to eliminate the credits that they currently provide.  (If that were to happen, Congress would have the power under the Commerce Clause to pass legislation requiring states to grant a credit.)  Thus, the potential importance of this case goes well beyond the particulars of the Maryland tax system, and the case has generated a slew of amicus briefs on both sides.  Linked below are the briefs filed by the parties, by the Solicitor General as amicus in support of Maryland, and by Miller and Chevalier on behalf of the National Association of Publicly Traded Partnerships in support of the taxpayers.

Oral argument is scheduled for November 12.

Wynne – Opening Brief for Maryland

Wynne – Brief for the Taxpayers

Wynne – Reply Brief for Maryland

Wynne – Amicus Brief for the United States

Wynne – Amicus Brief for NAPTP